Small Business Blues: SBA Stimulus Ends, Credit Tightens

It has been a cruel week for small businesses still struggling to emerge out of the financial crisis and credit crunch.

A key U.S. stimulus program for the Small Business Administration has run out, and the Federal Reserve confirmed that credit to small firms remains “substantially” limited.

The SBA announced that economic stimulus funds for its two top loan programs have run dry, and new loan volumes could shrink if assistance is not renewed. The SBA said $375 million in Recovery Act funds for use in “7(a)” and “504″ loan programs ended this week, leaving thousands of small business applicants in limbo.

The money was used to temporarily reduce fees on SBA-backed loans and raise SBA’s guarantee percentage on some loans from 75 percent to 90 percent. This meant a savings of tens of thousands of dollars in fees to applicant businesses. It also eased the burden on lenders who were more willing to issue credit.

“We are continuing to work with Congress on funds to continue these programs, which have helped engineer a turnaround in SBA lending following last year’s credit crunch and resulted in more than 40,000 loans to small businesses during these tough economic times,” said Jonathan Swain, assistant administrator for communications and public liaison at the U.S. Small Business Administration.

The SBA funds were approved through February 16, 2010, and SBA officials hope to extend assistance to that date, needing about $100 million.

In minutes released this week from the Fed’s Nov. 3-4 meeting of the Federal Open Market Committee, officials said that regional and small banks are still vulnerable to the deteriorating performance of commercial loans and they continue to “tighten lending standards,” the Fed reported.

“Smaller firms, which tend to be more dependent on commercial banks for financing, reportedly faced substantial constraints in their access to credit,” Fed officials said.

Small businesses are expected to continue to grapple with tight credit standards, and “will restrain from hiring” as a result, Fed officials projected.